Uwe Reinhardt: "Bankers and Patriots"

Uwe Reinhardt is a professor at Princeton whose son (the Marine mentioned below) served in Iraq. This piece first appeared in the Princetonian in April; I thank Willem Buiter for reproducing it on his blog.

As the Fed and the Treasury once again staff the shovel brigade behind one of Wall Street’s periodic asset-bubble parades – lest the foul economic odor in its wake seep too deeply into the rest of the economy – my mind wanders back to spring 2002, when the previous asset bubble had burst. At the end of the financial accounting course I then taught, I projected onto the screen the picture of a Princeton graduate who had just joined the Marines. “Take a good look at your classmate,” I told the 300 or so students in the class. “He is likely to be ordered abroad soon, there to lead a platoon of enlisted Marines into possibly lethal combat, for the sake of you and me, he is told. When he and his men come home – if they do come home – what will you have made of their country? Will you have used the accounting tools I taught you to make the country better and stronger, or will you have used them to engage in the shenanigans that drove our recent asset bubble and begot the current recession – just to make money, country be damned?”

America is a nation at war. Our sailors, soldiers and Marines fight with great honor at high risk to life and limb, and at very low pay, for what they believe to be our nation’s best interest. They often take added personal risks to avoid visiting collateral damage on innocent bystanders of a foreign land. Against that backdrop and the financial crisis and consequent recession now besetting our country, it is pertinent to ask: Do the leaders of our financial markets ever stop to think what their reckless recent conduct has done to the country these brave warriors fight to protect?

At their best, our financial markets play a pivotal role in enhancing human welfare. They then channel the savings of households, business firms and governments anywhere in the world efficiently to their most productive uses anywhere else in the world and allocate financial risk from those unable or unwilling to bear it to those who can tolerate it. Many of the recent innovations in these markets such as structured securities, currency- and interest-rate swaps, credit default swaps, and so on, have made these important functions ever more efficient.

But when investment banks seek profits by recklessly concocting hundreds of billions of mortgage-backed securities that are anchored in shaky mortgages whose quality no one has bothered to check, sell these dodgy derivatives to others, and even risk their own institution’s equity cushions by borrowing billions of dollars to invest in junk securities themselves, they are not making their country stronger. Instead, they act like reckless laboratory scientists who concoct toxic substances that can infect not only them, but also millions of innocent bystanders.

When investment banks sell multiple credit default swaps to buyers who do not own the underlying bond, but merely want to bet on its default, the banks stray into pure Las Vegas-style gambling. Productive risk taking is the central driver of efficient capitalism, but how does helping person A gamble on the default of a bond held by person B strengthen the American economy? Why not sell bets on the weather as well? No one seems to have a clear idea of the net financial exposure our banks have to the $45 trillion or so of notional credit-default swaps currently reported to be outstanding. In an era of widespread credit defaults, such multiple credit-insurance contracts on given bonds could confront some banks with huge claims that their equity cushions might not be able to absorb, forcing the Fed and the Treasury yet again to mobilize their shovel brigade, at taxpayers’ expense.

Finally, when, for handsome fees, smooth-talking investment bankers persuade unsophisticated treasurers of local school districts or small endowments to enter into highly risky and opaque interest-rate swaps, or into investing their limited funds in the so-called “toxic waste” tranches of complex structured securities, they are not making America stronger. They risk driving important local institutions to the brink of bankruptcy. An innate professional ethic deters the overwhelming fraction of our physicians from exploiting their patients’ clinical ignorance as no set of explicit regulations ever could. Does an analogous ethical anchor – a financial Primum Non Nocere – constrain Wall Street as well?

This is not an idle question. American leaders of finance now promise to practice self-discipline guided merely by regulatory principles rather than by explicit rules. That would be a sensible approach, but only in markets whose agents are ethically principled and, yes, patriotic – like, say, 18-year old sailors, soldiers and Marines.

Buiter added:

Uwe E. Reinhardt is the James Madison Professor of Political Economy and a professor in the Woodrow Wilson School of Princeton University. He can be reached at reinhard@princeton.edu.

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  1. Ancient Brit

    And what about leveraged buyouts? Have they strenghtened America or the other countries to which the practice has been exported?

  2. fuguez

    A financial hypocratic oath:
    “Do no harm.” What a novel idea!
    So simple and yet so powerful.

    I very much doubt you would get the snake oil sales people to get involved.

  3. Rootless Cosmopolitan

    I am not a patriot. I don’t love “my country”. I am with Samuel Johnson, that “patriotism is the last refuge of a scoundrel”. Thus, I can’t follow the impetus of this moral sermon at all. Why would I want to prefer one country over another and make it my purpose to particularly bring this country forward? I never would want to serve “my country”. I never would go to war “for my country”. Unfortunately, there isn’t anything analytical in this article by Reinhardt from which I could learn something. Unlike to the content of so many other articles you have posted here, so far, and for which I value this blog.

    Perhaps Reinhardt hasn’t heard yet, that the purpose of a capitalist undertaking isn’t the welfare of an imagined community (Benedict Anderson), called “nation”, but to make money for the owners of the undertaking. Nothing else. Capitalists will only be patriots, when it is convenient for the profits from their undertaking.

    And I would prefer a world without any borders and wars.

  4. Anonymous

    “And I would prefer a world without any borders and wars.”

    You want something that never was and never will be.

    Bring back the draft and universal service.hqtyi

  5. Anonymous

    Sorry to say this but Reinhardt drank the koolaid and put his son in harm’s way. It is amazing that even a Princeton professor can be suseptible to this.

    Maybe they have narrowed down the curriculum too much. Maybe one accounting course should be substituted with a study of the classics. Everyone should get a full dose of human history. It will make them better citizens, and better accountants.

  6. Chris


    You a terribly wrong to think that the purpose of capitalism is just to enrich the owners of production. The purpose is to allocate and distribute the resources of ones country to its citizens, just as it is with any economic system – be it a command economy or a free market economy. The manner in which this is done is the basis for the difference between these two systems – a fair allocation or an efficient allocation; but the ultimate end stays the same. In the case of a capitalist economic system, the pursuit of self interest is just a means to this end – a tool by which the goal of efficient resource allocation is pursued. Your problem, and what seems to be a prevalent problem in this country, is that the pursuit of self interest has become an end in itself.

    Yes, capitalism is a great way to drive human progress and to raise the standard of living of a country and its citizenry. But Reinhardt’s point is that, as we all play our parts in this economy, pursuing our own self-interest, we should not forget that our own welfare depends upon the actions of so many countless others (each pursuing their own self-interest), whether it be the soldier in the field or the baker at the supermarket. So we must carry out this pursuit with some sort of guidance or perspective that is greater than the simple goal of enriching one’s self; otherwise those actions can become corrosive and detrimental to the rest of the community, as we all have witnessed on a massive scale this year as the financial system in this country has been brought to its knees. And whether you see it or not, your welfare does depend on the healthy functioning of the community in which you live; so if it suffers, you won’t be immune to the effects. And I think you can agree that wouldn’t be within your own self-interest.

  7. Anonymous

    “Capitalists will only be patriots, when it is convenient for the profits from their undertaking.”

    And when they can be bailed out by the Federal Government for taking impudent risks with other people’s money.

    Your argument is absurd and naive, you want the benefits of a nation state — laws and the instruments of enforcement to protect us from each other, freedom from a Hobbesian existence of each man’s hand set against the other; without having to pay any price which interferes with the profit motive.

    Descend from space, come down to where you see actual people, doing actual work, within actual time and space limitations; and you will find societies organized around laws, to include those which govern markets and the use of force — all meant to be mutually reinforcing if it is to work well.

  8. Anonymous


    Really enjoyed reading that and hope that people here will pass it on as much as possible!

    Re: “Why not sell bets on the weather as well?”

    They do bet in weather derivatives, just ask Warren Buffet and the reinsurance people that have risk models for weather events that connect probability to casino betting. All part of the unregulated American Dream. Thank God for SIFMA and the lobby groups who enrich our way of life!

  9. Been there

    Anon 10:10-

    I could be wrong but I didn’t read the article as the if the son were following through on his father’s wishes. Rather, it seemed written by someone more like an observer who was inspired/ awakened by the idealism of the young people who volunteer to serve(which is separate from whether you agree or disagree with the politics of the war in Iraq). Maybe inspired in the same way as by a stanger who puts his own life at risk to save others from fire or threat.

    I think he’s really talking about integrity, the essence of which is making a keeping promises to others and yourself. These young people clearly are walking their internal talk.

    BTW, when was the last time you heard the term integrity associated with the way people in the financial community conduct themslves?

    I think the article does a nice job reminding us and providing context that our generation, and all that follow are stewards of the ideals that we (supposedly) aspire to as a nation, paid for with the blood of young people just like these over more than two centuries. It also means that, we as a nation, should be thoughtful before we enter conflict anywhere on the world stage, and make certain that committments we make are just and consistent with those ideals that we so treasure.

  10. Anonymous

    so right about integrity. That is the point, he was comparing the finance industry to the typical doctor or 18 year old warrior. The comparison shows how utterly pathetic finance is in the US. The average pedophile has more integrity (pedophiles don’t publicly claim to be providing a usefull service, don’t advertise for clients, etc.)

    “Reinhardt drank the koolaid and put his son in harms way” any evidence for this assertion? Is every topic an invitation to dispense irrelevant political opinions? Aren’t there blogs on politics for this?

  11. Bats in Batavia

    The very same investment banks that created this financial product mess (crying over their excess inventory and have lined up to the Fed window to get their dollop of “free” Treasuries (for the very same bad excess inventory) Again ahve their hand out asking the Congress for a $4B annual tax subsidy that goes mostly to the top firm. Pending on the Senate floor.

    Unbelievable. http://ataxingmatter.blogs.com/tax/2007/03/active_financin.html

  12. Anonymous

    To Chris in responding to Rootless Cosmopolitan …

    You said: You a terribly wrong to think that the purpose of capitalism is just to enrich the owners of production.

    You are correct. That is not capitalism. It is Fascism.

  13. Anonymous

    A nicely written article. I happen to believe integrity is a necessary ingredient of capitalism.

    The current scam from the city and wall street scam is a reflection of the corruption of the regulatory, policy, military, and legislative functions of democratic governments across the world.

    I would like to say that the corruption came with Bush/Cheney, which it has. But they simply built on a foundation of corruption that has turned the purpose of accounting statements from investor disclosure to tools of deception.

    Off balance sheet vehicles ? The only usefull purpose is to hide liabilities from investors and regulators and to defraud the public.

    Lieing about the riskiness of a security for the purpose of selling it does not translate as shifting risk from those that do not want it to those that do. The presumption that derivatives serve to transfer risk is a fundamental disconnect. The current financial mess was incubated in a broth of historically low volatility trumpeted as evidence of reduced risk emanating from derivatives. All hogwash.

  14. Anonymous

    Ever so much thanks for reposting this piece.
    As an observer of the human condition,it is ever so interesting to view the comments of the presumably wealthier “free marketeers”.
    Having observed, decades ago some of the more extreme welfare rights demands, it is shall I say, amusing to see the similarity of arguments of these two groups. And the utter rage demonstrated by the possible frustrations of their desires.
    If my memory serves me correctly this nation was started with the phrase “We the People”. And was forged by clash of arms as a government “of the people,by the people and for the people.
    And the People have shown that they want the idea of “First do no harm” extended far beyond medicine. Product liability, police brutality laws are just two examples.
    I and perhaps others thought that the financial industry was similarly regulated. But these young bucks with their shaman- lawyers broke from the Reservation and have pillage the countryside. Time to round them up and pen them up,


  15. Rootless Cosmopolitan

    Let me add to what I previously wrote.

    If Reinhardt really would like to make a moral argument, why does he complain about the lack of patriotism of the bankers then? Capitalism is a global system with a global redistribution of resources and wealth. 25 percent or so of the people, mostly living in the richest countries, use up 80 percent of these resources. The inequality between a minority of winners in the capitalist system and a large fraction of Earth’s population grows larger and larger. Why does Reinhardt request then that the bankers act in a way that benefits primarily one country and its citizens, but not humankind as a whole?

    Thus, Reinhardt’s call for patriotism is nothing else then just a disguised egoism, too. An egoism on behalf of one particular group of people in this world which claims a disproportionate share of the world’s resources, but thinks a subgroup takes too much of the cake.

    Thanks for the replies to my first comment. I’ll try to answer to them later.

  16. Been there

    Rootless said “…If Reinhardt really would like to make a moral argument, why does he complain about the lack of patriotism of the bankers then…”

    Was Reinhardt making a moral argument-or- was he simply trying to influence the 300 financial accounting students in his class to reflect upon the type of legacy they wish to leave behind. He didn’t seem to be complaining about the IB’s lack of patriotism (Actually, didn’t see him use that term anywhere in his article). Rather, he cited a number of activities conducted by the IB’s over the past few years, where he was indirectly questioning their ethics.

  17. STS

    This is an important debate. Capitalism is driving globalization but is leaving all the other institutions that contribute to a modern political economy behind.

    I would love to be finished with nationalism and war, and let free markets rule everything … EXCEPT … for one inconvenient fact: free markets can exist only given strong public institutions that enforce the rule of law and property rights.

    We need to set about the task of harmonizing governing institutions around the world. Purely financial globalization is threatening to bankrupt us all with its Ponzi schemes long before it teaches the developing economies the value of transparency, due process, and human rights.

    I don’t think the value system of the Marine corps is some kind of panacea for our banking ills, but Professor Reinhardt is correct to point out that values other than the almighty dollar play a necessary role in a civilization capable of sustaining modern banking.

  18. etc

    Reinhart: “our financial markets … channel … savings … and allocate financial risk … Many of the recent innovations in these markets such as structured securities, currency- and interest-rate swaps, credit default swaps, and so on, have made these important functions ever more efficient.”

    This guy is clueless. Derivatives are mostly profitable in large part because they are an indirect way of doing banking, brokerage, and insuring business without the burdens of regulation. Avoidance of these regulatory burdens imposes costs on society. Derivatives allow foreign investors to invest in total return swaps that avoid local country withholding tax on dividends, interest, guarantee fees, and so on, which undercuts the progressive nature of the tax system by reducing taxes on wealthy owners of capital. Derivatives allow investment funds to effectively engage in the business of insuring risk and lending without being subject to regulatory capital requirements that prevent companies from causing too much systematic risk. Derivatives allow investment funds to avoid disclosure required when one acquires a 5% stake in a public company, disclosure which is intended to protect outside minority passive investors. I could go on.

  19. Dan Duncan

    Let me see if I have this straight:

    Rootless begins his scintillating first post with:

    “I am not a patriot. I don’t love “my country”. I am with Samuel Johnson… Thus, I can’t follow the impetus…Thus why would I want to prefer…I never would want to serve “my country”. I never would go to war “for my country….”

    with a follow up post that actually accuses another of “egoism”.

    And then Rootless leaves us in a state of breathless anticipation, but undeniable relief with:

    “Thanks for the replies to my first comment. I’ll try to answer to them later.”

    Oh my…Thank you Rootless. I can’t tell you how concerned I was that you weren’t going to follow up!

    Talk about egoism!

    You’ve exercised your right of free speech, granted to you by this country, now I’ll exercise mine:

    Think San Francisco in the late 60s. A group of 5 Beatniks, replete is special psychedelic tie die, hittin’ the ganja weed after a 48 hour LSD bender and pondering the mysteries of the universe and our place in it…couldn’t even begin to capture the nano-sized insignificance of your refusal to serve this country. I mean really…what are you withholding…anonymous blogger postings with rehashed, regurgitated Leftist blather?

  20. Lune


    I guess you’re getting piled on here, but I can’t resist joining…

    Firstly, you’re correct that the narrowly defined tenets of capitalism is to maximize the return on capital. But Reinhardt isn’t appealing to bankers as capitalists. He’s appealing to them as Americans and as human beings. Physicians are nominally capitalists too (they’re the quintessential small business owner). But they see themselves as much more than that, and use the sum of their roles (as physicians, as local community members, as stewards of health care resources, and yes, as businessmen) to guide their decisions. Most of the time, when the ethical precepts of the medical arts come in conflict with the capitalist principles of their small business, they choose the former course of action. Reinhardt is asking bankers to do the same. He’s not saying capitalists should be patriots. He’s saying bankers should be more than merely capitalists.

    Secondly, you are incredibly superficial in your thinking if you think that somehow your country of residence doesn’t matter to your attempts to be a pure capitalist. Without the regulatory, enforcement, legal, cultural, etc. etc. regimes that the government and American society have put in place, there is no way in hell that you would be able to be a capitalist. Who would invest their money in a hedge fund headquartered in NYC, with a bunch of managers you’ve never met, unless you have faith that the government’s regulatory and enforcement arms are ensuring that you’ll be following the law? And when you take your billion dollar nest egg and put it in a bank, what’s to keep that bank from absconding with that money? For that matter, what prevents the local villagers with pitchforks in hand from storming your gated community and stripping you of every hard asset you own (plus your wife and kids for good measure)? Heck the very notion of a corporation, so necessary to the practice of capitalism these days, is a creation of the law of your country (and state). If you want a libertarian paradise, try Darfur, Sudan. Last I checked, no one’s managed to become a billionaire from there despite the absolute lack of any “overbearing” government or quaint notions like patriotism or local community.

    So why does the government create and maintain these enormous, complicated structures that allow capitalism to function? Because they’ve recognized that when properly harnessed, capitalism can serve the public good. You’re right that capitalism is defined to serve capital. But that’s not the government’s purpose. And when capitalism isn’t serving the public good, it’s very appropriate for the government to revisit the systems it has in place to see how best to revise and re-harness capitalism to serve the public good (or to throw it out and try a different system…). Bankers can be a part of that process, recognizing that they are more than just mere capitalists, or they can let others dictate these terms.

    So should you be a patriot? Yes you should. It’s one of the roles you should undertake as someone who enjoys the privileges of citizenship in this country. It has nothing to do with being a capitalist. Patriotism is indeed the last refuge of the scoundrel, but that doesn’t mean all patriots are scoundrels (logic 101 if you skipped that in your capitalist training). Because there’s more to life than just being a capitalist. And if capitalism truly can’t be harnessed for the public good, if that’s so antithetical to the very theory of capitalism, then the government shouldn’t be bending over backward right now trying to save it.

    Oh yeah, and lastly, you’re betraying capitalism if you say you don’t want any borders or wars. Plenty of capitalists find loads of profits in wars and arbitrage opportunities in borders. Shame on you to think of something besides money, right? Or perhaps there’s a twinge of a desire for something besides money in you yet…?

  21. cletrac

    Sorry, but I am a leftist and I do leftist blather. I served my country and I continue to serve my community as part of the local government. I have a very right wing sister-in-law . Neither she nor her husband have served their country but avidly support Bush’s wars as long as their son does not go. Her husband argues that in his job ethics do not matter as long as his company makes money.
    Leftists can be more loyal and constructive community citizens than most rightists.
    I deplore people who want the protection and benefit of laws without the responsibility to defend, respect or obey them.

  22. cosmo kramer

    As a true rootless cosmopolitan I’m going to do business not in the US but in the 20 or so countries that are less corrupt, the 11 or so that are more developed, or the 100 or so that are less violent. Or a just a place with a functioning constitution and demonstrable rule of law. So don’t give me rah, rah, sis-boom-bah America shit.

  23. Anonymous

    I saw someone else point this out:

    there are derivatives on which you can trade the weather. Not surprising that an esteemed professor teaching in an MBA program wouldn’t know that. MBA’s are a vetting process to ensure that you aren’t stupid, but they hardly ensure that you are actually smart – in the “street sense” vs. “book sense” – the former being all that matters in the real world.

    Additionally, why shouldn’t you be able to trade CDS if you don’t have an underlying position in a firm’s debt structure? He TOTALLY misses the problem, which is that there should be substantial margin requirements for the SELLERS of CDS. If that were the case, the CDS tsunami wouldn’t exist. I’d prefer to see things exchange traded vs. OTC, but since OTC presumably isn’t going away, then there should be significant improvements in margin regulation for this area.

    Guess I’ll have to add Princeton to my list of unimpressible institutions.


  24. ScottH

    Leaving aside the intrinsic good nature of human beings not driven by greed (vs. duty to shareholders), anger and ignorance, officers and directors of public companies operating in the “zone of insolvency” owe a fiduciary responsibility to ALL STAKEHOLDERS in the corporation. That includes employees, such as the tens of thousands that are falling out of the investment banks this very week, and arguably – since large investment banks and major money center banks form the framework of our financial system (for better or worse) – the public at large. i.e. the citizens of the nation whose federal and state laws have allowed capitalism to establish, to flourish and even to fail. Oh wait, too big to fail. Privatize the profits, socialize the losses.

    Are these companies operating in the zone of insolvency? I would say that the actions of the Fed over the last six months would fairly clearly indicate that to be the case. And yet, the good officers and directors of said corporations are addressing the interests of only a very few … not the shareholders, not the employees, not the citizens of the nation who are in a very real sense, stakeholders … and who are now suffering terribly at the hands of these shysters who pretend to serve shareholders. They serve shareholders when an action that favors them also favors shareholders. First and foremost: self-interest, wealth, power.

    Lock ’em all up. The highest levels of our financial system comprise a cesspool of historical dimension, and I believe they will _not_ be out of reach when their prior and current actions boomerang back at them … it’s already started and it’s nowhere near finished. Greed made them, greed will bring them down.

    Hopefully some of those young soldiers who have a sense of ethics, of right and wrong, will take their place and will be patriotic enough to set aside some portion of their personal ambition and greed so as to avoid collateral damage to substantially everyone else in the system – those who are not money changers and counters of Mexican jumping beans. Maybe we will even see CEOs who don’t make 1000 times what the janitors make, and who don’t sail away from the trouble they caused suspended from golden parachutes awarded by their Comp Committee co-conspirators.

    Time for the regulators to start doing their job. And by regulators I don’t mean the Fed. I think we will see a new sheriff in town soon … and he may just see to it that the regulations and laws of this land are enforced and strengthened to protect against future debacles … assuming the financial system survives the body blow inflicted upon it by those who have been running it.

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